Bin Flashcards
01 Notes. Strategy is about:
About the whole, not the parts, cannot be separated from the whole. It’s about the performance towards a shared objective. competitive value of interdependent parts fit/reinforce one another that makes it sustainable
01 Problem Framing is:
Recognizing and capturing a strategic issue in a specific managerial situation.
01 To achieve a strategic position and understand the whole business picture, we need:
Targeting, Value Proposition, Resources Capabilities
01 Starbucks target audience:
Affluent/high income/tech-savvy
01 Starbucks value prop:
coffee quality, store atmosphere, and good service
01 Starbucks resource:
strong brand and store environment
01 Southwest Target:
cost-conscious customers, no frills and looking for the best value for their $
01 Southwest Value Prop:
centered towards customers, allowing free checked bags, flight changes, and in-flight entertainment
01 Southwest Resource:
Operational efficiency, only 1 aircraft type and no seating assignment. easy maintenance, cabin crew training, alternative aircrafts, reduced boarding time
01 How to win competition (through holistic strategy):
Create competitive advantage within the activities that produces a system effect that’s better than competitors.
01 What is agile methodology?
Methodology mainly used in software development, which involves high collaboration and adaptive learning.
01 Strategy vs Operational Effectiveness
OE involves performing similar activities better but S.positioning involves performing different activities or similar activities in a different way
01 productivity frontier
the maximum value/best product that a company can create with its resources
01 what was the false trade-off in the 1980s?
trade-off between cost and defects, which was recognized as illusion and simply resulted in poor operational effectiveness
01 why constant OE is not sufficient? why is it mutually destructive?
such best practices, mgt techniques and technology can be rapidly diffused and immitated by competitors quickly. Ex. US commercial printing companies provide the same array of products competing head to head. they become very generic and identical
01 What do companies do to tackle OE competition?
consolidation, they buy up their rivals
01 How is Southwest Airlines different? what kind of strategy?
They offer short-haul low cost flights between midsize cities and secondary airports. They use low prices and frequent flights to attract customers who would rather have driven by car.
01 How is Ikea different?
Their target are customers who want stylish furniture at low cost. And they use a self-service model based on clear displays that eliminates the need for salespeople.
Extra services such as in-store care and extended hours that match young unwealthy customers who may not have a nanny and shop at odd hours.
They engaged in tradeoffs, where the more self-service and have people do their own assembly and delivery, the less able they are to satisfy high service requiring people.
01 Origins of strategic positions
- Producing a subset of an industry “variety-based”
- Serving a particular group of people. “needs-based”
- Segmenting customers who are accessible differently. “access-based”
01 What does Jiffy Lube do differently?
They specialize only on automotive lubricants which they produce fast at a low cost
01 What does Vanguard group do differently?
They offer funds with predictable performance. Many investors keep Vanguard funds in their portfolio while buying more aggressive ones from competitors
01 What does Bessemer trust company do differently?
They assign a sophisticated account officer to certain # of families and thus configure a personalized service
01 What does Carmike cinemas do differently?
They operate movie theaters to cities of smaller population only. Less sophisticated technology, low-cost theater systems, low rent/payroll. Being dominant in their market also allow better negotiation terms with distributors.
01 What is strategy?
creating a unique and valuable position involving all the interdependent activities within the company
What is straddling?
A type of immitation where they match the benefits of the competitor while maintaining their own position
What did Continental Airlines do?
They did straddling. They created a new service Continental Lite similar to SW which also has more frequent flights, cheaper fares while still remaining a full service airline.
Eventually, they couldn’t compete on price and pay standard agent commissions, so it had to compromise by cutting commissions, lowering rewards, and late flights. These led to angry customers and loss in profit.
What did Neutrogena do?
They engaged in trade-offs that are hard to immitate. They said no to deodorants and skin softeners and sacrificed the potential for such sales.
Why are trade-offs essential to strategy?
They prevent straddling or imitators and competitors who engage in such practices would have to degrade their own services. The essence of strategy is choosing what not to do.
01 What is Southwest’s fit
All of SW’s activities fit one another that creates economic value.
01 What is Vanguard’s fit
VG aligns its activities with its low cost strategy, they avoid broker commissions by distributing funds directly, rely on PR instead of advertising and do not need high comp money managers.
01 What is Neutrogena’s fit
They have soaps with customized packaging with hotels who are eager to offer soap recommended by dermatologists. Once guests try the product, they are likely to ask their doctor or or buy it from the drugstore.
01 What is Bic’s fit
Bic sells low-cost to all markets on all channels. This complements their manufacturing activities that focus on purchasing low-cost materials, ease of manufacturing, and in-house production.
Also, their heavy advertising, frequent packaging changes, POS displays stimulate impulse buying from customers.
01 Vanguard’s activity system
They make sure that each activity is consistent with the strategic positioning, and they let these activities reinforce/strengthen each other.
01 How can strategy be sustainable?
The strategic fit among the activities make it difficult to be immitated because competitors would need to configure many activities. The stronger the fit, the more sustainable the advantage becomes. Rivals can get little benefit unless they replicate everything.
How long should strategy take?
It should have a horizon of decade or more, not a single planning cycle.
01 Why companies don’t have a strategy?
They’re caught up with the best practice mentality, they think having a trade-off is a weakness and they try to be customer-focused which means they want to serve everybody.
The desire to grow and try to do everything
01 Case of Maytag
Because of their success with reliable washers, they were pressured by dealers and customers to extend their line of products. They acquired other businesses and sold refs and cooking products. They grew substantially but return on sales declined.
01 How to approach growth?
Profitable growth. Deepening strategic position instead of broaden it by adding easy features/services that don’t adapt to the strategy. Globalization.
02 the 5 forces
Existing competition
Bargaining power of buyers
Bargaining power of suppliers
Threat of new entrants
Substitute products
02 What advantage do incumbents have toward new entrants?
Barriers to entry
supply side economy of scale
demand side economy of scale
switching costs
02 Why supply-side economy of scale bar new entrants?
Incumbents have lower cost/unit & better supplier terms & more efficient technology
Intel have scale economies in research, marketing, and chip fabrication.
02 Why demand-side benefit of scale bar entrants?
The more patrons the incumbents have, the more likely those keep buying. Network scale
Ebay has many trading partners and customers aren’t willing to buy from a newcomer. No one ever get fired for buying from IBM.
02 Why customer switching costs bar entrants?
Customers might need to retrain employees, alter product specs, modify existing systems when switching to a new entrant.
SAP. ERP software with high switching costs once installed. It’s nature is critical to operations to not worth changing.
02 Why capital requirements bar entrants?
Entering an industry means up-front costs like fixed facilities, advertising or research that are unrecoverable.
02 What are other unique advantages of incumbents against new entrants?
proprietary technology, preferential access to the best materials, most favorable geographic locations, established brand identity
02 How can unequal access to distribution channels bar new entrants?
entrants would need to displace the competitor’s products from the shelf, and wholesale/retail channels can be limited so they might need to create their own
02 How can restrictive government policy bar new entrants?
governments may have licensing requirements, patent, and fdi limitations,
02 How do incumbents retaliate?
Incumbents release public statements that show their commitment to market share
They use their excess cash and unused borrowing power. Cut prices
02 ROIC
return on invested capital is the appropriate measure of profitability for strategy formulation to consider the full amount required for to compete in industry, that growth rate/return on sales doesn’t show
02 What’s a good industry analysis when considering entry?
Understanding the business cyle, the root causes of profitability, look quantitively: how much % of industry sales are required to make a plant, the buyer’s switching cost, how much can R&D/marketing reduce margins, etc.
02 How the power of suppliers influence profitability?
Suppliers can charge higher prices, or limit quality.
Microsoft has influence on the prices that PC makers can set.
02 In what ways can a supplier group be powerful?
The supplier does not rely heavily on 1 industry. They can try to maximize profits and can afford to lose.
The supplier has no subtitute.
There is cost in switching to another supplier.
02 When would buyers have negotiating leverage?
There are few large volume buyers
Easy to find an equivalent standardized product.
They can make the product themselves instead of buying if profitable
02 When would buyers be price sensitive?
The product makes up a significant part of their cost.
Low profit, and need to trim costs.
They don’t need high quality and can find alternatives.
02 What is Dupont’s bargaining power?
They advertise their Stainmaster carpet fiber to end-users. So end-users demand carpet manufacturers for Stainmaster fiber, even when Dupont doesn’t make carpets.
02 Example of indirect product subtitute
You sell software for travel agents, however airlines websites remove the need for travel agents/your software.
02 How can a substitute threat be high?
If the price-peformance tradeoff is high. Much cheaper/convenient to use netflix than rent video. Much cheaper to use Skype than long distance telephone.
02 Existing competitor rivalry can be intense when:
There is no leader.
Exit barriers are high. Some companies may need to stick to a particular business & specialized assets.
When they compete only on price, because it’s the customers who win.
02 When can competition be zero-sum or positive?
When one’s firm gain is another one’s loss, it’s zero-sum.
If each competitor takes care of different segments with different mixes of 4Ps to have many options for the customer, it’s positive sum.
02 Pitfalls to be careful of when analyzing industry factors.
Industry growth rate.
Advanced technology.
- They don’t necessarily mean profitability.
Complementary products/services. (sum of value of 2 > 1)
02 Why is it important to understand change in industry structure?
They can boost the profit potential or reduce it.
02 What can competitors do in the face of intense competition?
They turn to merger & consolidation
02 Why do we need to know the 5 forces?
They help us understand why industry profitability is what it is, what controls it, and understand ourselves and how we can cope with the competition.
02 What did Paccar do?
By focusing on truck owner-operators, allowing them to personalize their trucks with luxurious interior where they spend most time, Paccar found a portion of the industry where the competitive forces are weaker which allowed them to be profitable for many decades.
02 How can industry structure be reshaped?
Overall profitability can be expanded or redivide it to favor the incumbents.
02 How is understanding industry structure good for everyone?
They help strategists see + or - game-changing trends and focus on factors that create true economic value and uncover true opportunities.
02 How did Apple exploit changes in the competitive forces?
Record companies were reluctant to sell their music but consumers want to download music online more. Apple served as a gatekeeper.
02 What did Pepsi CEO say about coke in the 90s?
a battle without blood. without Coke, wouldn’t be a lively competitor, and Pepsi might be the best contributor to Coke’s success
Until 2000’s when average per capita CSD consumption declined
How is CSD unique from others?
Americans drank more CSDs than any other beverage. Until 2009 its market share grew every year.
CSD participants
concentrate producers
bottlers
retail channels
suppliers
Concentrate producers’ major costs & what they do?
major cost is advertising/marketing. they blend the raw materials, packaged in plastic canisters and shipped to the bottlers
What are CDAs
customer development agreement. coke and pepsi offered funds for advertising in exchange to shelf space in walmart and other supermarkets
Who are the major concentrate producers?
Coke & Pepsi make up 72%. Next was Dr Pepper and Cott Corp
Bottlers major costs & what they do?
major cost is concentrate and syrup. They purchase the concentrate, added carbonated water and hf corn syrup
What is Coke & Pepsi’s DSD?
Direct store delivery. They deliver directly to the shops, secure the shelf space, and set up the displays
How did Coke franchise agreement changed?
The 1899 contract was fixed price. After many disputes, Coke changed but was still able to determine the concentrate price, and no obligation to assist in advertising.
What is the CSD intrabrand competition act?
Congress preserved the right of concentrate producers in granting exclusive territories, so bottlers cannot sell competing brands. At first, the FTC thought that it prevented competition, but concentrate producers argued that interbrand competition was enough.
CSDs in retail channels
4% of US store sales were CSDs, it’s a major draw in supermarkets
How did Coke & Pepsi retail?
Pepsi focused on retail outlets (grocery stores & drug chains), while Coke focused on fountain sales (restaurants/cafeterias)
Both developed dispensers/equipment and provided promotional material to stores
How did Coke & Pepsi compete within fast food chains?
Pepsi supplied deals with Taco Bell and KFC, while Coke deals with BKing and McDonald’s. Coke took Subway
How did Coke start?
Invented by pharmacist John Pemberton, Asa Candler bought the formula and sold bottling franchise for a nominal $1.
Sold in 1919 to investors and went public. Woodruff pioneered open-top coolers in stores to place Coke on arm’s reach. Lifestyle advertising.
Coke during war
Eisenhower promised every army gets coke. US govt set up coke plants overseas which cemented its postwar market share in Asia and Europe.
How did Pepsi start?
Alfred Steele, a former mktg executive was the first CEO and wanted to beat Coke. CEO Kendall started a Pepsi generation campaign. Pepsi sold concentrate at a lower price than Coke.
Cola Wars
In the 60s both experimented with new cola and non-cola flavors. Coke’s Fanta, Sprite & tab were Pepsi’s Teem, Mountain Dew, and Diet Pepsi. In the 50s-70s, Coke focused internationally assuming US is saturated, while Pepsi doubled its market share.
Pepsi Challenge
Coke was dominant in Dallas texas. Through blind taste tests, the company demonstrated that people actually preferred Pepsi. After sales shot up, they did the campaign nationwide.
How did Coke counter Pepsi Challenge
Rebates, price cuts, and ads that question the campaign validity. Nevertheless, Pepsi eroded Coke’s share. Later on Coke agreed to link the concentrate price changes to the CPI
Coke changed formula
Due declining share in 1985, Coke changed formula and loyal customers complained about Coke’s change. Pepsi claims it was mimicked. Coke sold Coke classic while the flagship product is the new Coke.
3rd largest producer
Was Cadbury Schweppes. Bought Dr Pepper and 7Up. Coke and Pepsi still squeezed space out from shelves.
Coke bought bottlers and CCE
At a dinner announcement, bought smaller bottlers. Created CCE which later became the biggest bottler. Bought small bottlers and sold to CCE.
Adapting to the times
Federal nutrition guidelines deemed CSDs as the biggest cause of obesity. Banned from schools. Health concern is the biggest risk factor to coke. Coke & Pepsi responded with more innovative marketing.
Coke Zero
Became the most successful new CSD. Especially marketed to younger men who shunned the “diet” label. Both companies ventured into the non-carbs category including juice drinks, sports drinks, tea-based drinks.
Bottled Water
Both companies had Dasani and Aquafina. Using their distribution network power, outstripped competing brands.
Coke int’l sales
80% of Coke sales were international. While more than half of Pepsi’s was domestic.
Adapting to int’l markets and obstacles
CSD consumption abroad was lower so both companies pursued non-carbs opps.
Regulations, foreign exchange controls, advertising restrictions. China rejected Coke’s purchase of Huiyan Juice.
Coke offered Sprite tea, Pepsi experimented with drinks with chinese herbs.
Evolving strategy in bottling
Later on, concentrate makers bottled their own products and distributed directly to retailers, bypassing bottlers.
Better returns that CSDs
Energy & sports drinks were more profitable, though volume was not higher.
Effect of mass-merchandiser growth
Consolidation in the retails space meant that a huge portion of CSD’s sales are from retailers like Walmart which made them negotiate the prices lower.
load factor
portion of flown seats that are occupied by paying passengers
yield
the price the passenger pays for 1 mile
what did major airlines do about high costs to increase load factor?
hub-and-spoke model. flights from lightly traveled cities transfer passengers to hubs in major cities
why subsidiaries of legacy carriers didn’t succeed?
They don’t work because they’re not really low cost. The parents hide the expenses in its financials.
CAlite’s complicated logistics & mixed flights resulting in day without meals disappointed passengers.
Shuttle’s low cost were only short-term because labor unions who don’t want to help the airline reduced its independence.
Metrojet only hoped to offset its costs with the US Airway’s strength.
what is RBV
resource-based view. it combines internal analysis within the company and external perspectives about the industry
tests of competitively valuable resource
- inimitability
- durability
- appropriability
- subsitutability
- competitive superiority
what is lbo
leveraged buyout. purchase of company through significant debt
